Fiscal consolidation combined with structural reform offers the best prospects for global economic growth and reducing trade imbalances, a policy note from the OECD suggests.
The note reports different scenarios for the world economy to identify what combination of policies is likely to be most successful in delivering strong, balanced growth, sound public finances and sustainable current account positions.
The policy simulations show that, in the baseline scenario characterised by only gradual fiscal consolidation, high government indebtedness would dampen medium-term growth prospects.
Fiscal consolidation that reduces the ratio of government indebtedness to GDP by 2025 to pre- crisis levels would only have a limited impact on external imbalances, in part because all OECD economies would engage in consolidation simultaneously.
The fiscal consolidation scenario can be augmented with structural reforms to reduce (raise) savings in surplus (deficit) countries, especially China, dynamic non-OECD countries in Asia and the United States, and reduce unemployment in the euro area.
This scenario suggests that:
- Over the longer term global output would be higher than in the baseline scenario. This is due to a combination of lower long-term interest rates and a removal of distortions that constrain consumption and investment in surplus countries and savings in deficit countries. Set against that, welfare enhancing social reforms in China and other non-OECD economies would lower savings and increase interest rates.
- Global imbalances would also improve. In particular, the external deficit of the United States and the Chinese surplus would be reduced significantly, not only relative to the baseline scenario, but also relative to the fiscal consolidation scenario.
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